Jakarta, IO – Soaring food and energy prices that have driven up inflation are threatening the global economy, including that of Indonesia. All countries have taken various measures to control inflation, a main obstacle to economic recovery. The dire situation triggered by two major events, namely supply chain disruption caused by the Covid-19 pandemic and geopolitical turmoil sparked by the Russian-Ukraine conflict.
The price of palm oil has also started to climb since mid-2020. Initially caused by the massive fiscal stimulus enacted by many countries. Vast portion of the disbursed funds flowed into the commodity market, which in turn pushed prices up. In 2020 and 2021, quantitative easing carried out by the world’s four major central banks (US, EU, Japan and China) increased from US$15.4 trillion in 2019 to US$24 trillion in 2020 and rising further to US$24.5 trillion in 2021.
As a result, global palm oil price increased from US$872 per metric ton in 2019 to US$1,045 in 2020 and went up further to US$1,350 in 2021. However, when quantitative easing was gradually tightened in 2022, many analysts predicted that global palm oil prices would decline. But then the Russia-Ukraine war erupted, causing a disruption in the supply of vegetable oil in Europe as Ukraine is the largest producer of sunflowers. In addition, the imposition of various economic sanctions on Russia exacerbated the overall food supply problem. As a result, the prices of vegetable oil shot up beyond market expectations.
Indonesia, the largest producer of palm oil, which together with Malaysia controls about 85% of the world’s palm oil market share, is the main beneficiary as the prices of fresh fruit bunches (FFB) increased significantly. The government also receives higher tax revenue and export levies, and the industry as a whole becomes extremely profitable. The contribution of the palm oil industry in improving people’s welfare and creating jobs is strongly felt. Therefore, palm oil producing countries should take full advantage of this situation and gain greater benefits.
On the other hand, the increase in global vegetable oil prices, especially palm oil, also has a negative impact, in that it also led to a considerable rise in domestic cooking oil prices since mid-2021, far exceeding the retail price ceiling (HET) set by the government at that time.
A raft of cooking oil policies
In response to the spike in cooking oil prices, the government issued various policies. First, on January 11, the Trade Ministry issued Regulation 1/2022 which expanded the supply of packaged cooking oil through various distribution channels, both retail and traditional markets, with a financing scheme from the Oil Palm Plantation Support Fund Management Agency (BPDPKS). Second, on January 18, the trade minister enacted Regulation 2/2022 which stipulated the implementation of Domestic Market Obligation (DMO) policy for exporters of palm oil, RBD Palm olein and used cooking oil (UCO).
This was followed by Trade Minister Regulation 3/2022 issued on January 19, which set the price of cooking oil at Rp14,000 per liter, enforced in traditional markets and modern retail stores. It further issued Regulation 6/2022 on January 26, which stipulated the Retail Price Ceiling (HET) for bulk cooking oil at Rp11,500 per liter, plain packaged category at Rp13,500 and premium packaged at Rp14,000 per liter, effective since February 1.
Furthermore, on February 8, the Trade Ministry published Regulation 8/2022, imposing a Domestic Market Obligation (DMO) on all exporters of palm oil products and derivatives. They had to set aside 20% of their respective export volumes and sell it under the Domestic Price Obligation (DPO) of Rp9,300 per kg for palm oil/CPO and Rp10,300 for RBD Palm olein, otherwise no export permit would be granted. The DMO was eventually increased to 30%.
After more than a month of implementing the DMO and DPO policies, the price of cooking oil remained significantly higher than HET, averaging Rp16,000 per liter. Worse, the essential commodity became scarce in certain areas. Desperation led to tragic and senseless loss of life as a lengthy line of people waited in the scorching sun for hours to get their hands on cooking oil. The issue is that the DMO and DPO policies that have been implemented have not been effective in addressing the community’s high cooking oil prices and scarcity.
Finally, the DMO and DPO policies were rescinded, and replaced with direct cash assistance of Rp100,000 per month for about 20 million lower middle class beneficiary households. The government let the price of packaged cooking oil to follow the market price while the price of bulk cooking oil pegged at Rp14,000 per liter. This policy was supposed to solve the availability and affordability issue. The increase in the expenditure of the lower middle-class segment.